The Canadian dollar on Monday closed at a one-year high
against the U.S. currency, partly because Canada is increasingly viewed as one
of the few safe havens in a world beset by debt and stagnation.

But the currency has also benefited from the growing conviction
that the U.S. Federal Reserve will embark on more stimulus measures, higher
metal prices and indications the Bank of Canada is more likely to raise interest
rates than cut them.

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The commodity-sensitive loonie was off the best levels of the day
but still closed up 0.07 of a cent to $1.023 (U.S.), its highest level since
Sept. 1, 2011, after moving as high as $1.0251.

“More and more global investors are seeing Canada as one of the
shrinking number of real, or true safe haven countries out there and they’re
buying our debt instruments and that’s supporting our currency,” said Sal
Guatieri, senior economist at BMO Capital Markets.

Of course, the higher dollar is not unvarnished good news.

It’s great for holiday makers who want to buy cheaper U.S. dollars
and also take advantage of the higher duty-free exemptions that kicked in June
1.

It’s not so great for exporters and retailers.

“There’s no doubt a strong Canadian dollar poses challenges to
Canadian retailers, especially given the growing trend of Canadians to shop
abroad,” said Mr. Guatieri.

“Similar to the impact on many retailers, Canadian manufacturers
are being challenged by the strong Canadian dollar.

“Overall there tends to be negative impact on our manufacturing
sector and of course, our overall trade position as we’re seeing with our
current account deficit running more than 3 per cent of GDP, so that
represents a drag on our economic performance.”

The dollar has particularly gained ground over the past week as
financial market traders increasingly reckoned that the U.S. Federal Reserve is
going to step up with another jolt of economic stimulus to keep a fragile
recovery on track.

The precarious state of the U.S. economy was thrown into
relief last Friday when already modest job creation expectations were dashed,
with the economy creating just 97,000 jobs. On top of that, job creation figures
for June and July were revised downward.

It is widely expected the Fed will announce further stimulus
Thursday at the end of its two-day meeting on interest rates.

“It could take the form of just a modest endeavour to push out
its rate guidance and lower long term rates or perhaps a more aggressive measure
of renewing its asset purchase program,” said Mr. Guatieri.

In other words, the Fed could embark on yet another round of
quantitative easing, which sees the central bank print more money to buy up more
bonds, which in turn has a weakening effect on the greenback.

“What that means is that U.S. longer-term interest rates are
likely to fall faster than Canadian rates,” he said.

“The positive rate spread in favour of the Canadian dollar, both
the short and long gains will persist for quite some time and that’s drawing a
lot of capital into Canadian debt markets and pumping up our currency.”

The dollar was also supported by the hawkish stance by the Bank
of Canada. The central bank left its key rate unchanged at one per cent last
week and maintained language indicating that rates will likely rise at some
point in the future.

“I think that it reinforces the message in global investor minds
that interest rates are likely to remain relatively higher here in Canada than
in many other advanced countries, where they’re likely to go up sooner in Canada
than elsewhere and therefore Canadian debt instruments look very attractive,”
said Mr. Guatieri.

Hopes for further stimulus measures from central banks pushed
copper prices to a 17-week high. The December contract in New York was ahead
4 cents to $3.69 a pound, adding to a 13 cent jump on Friday.

Oil prices rose for a fourth session with the October crude
contract on the New York mercantile Exchange ahead 12 cents to $96.54 a
barrel.

Imports declined 2.6 per cent from a year earlier during August,
below analysts’ expectations of growth in low single digits. That came on top of
August’s decline in factory output to a three-year low and other signs growth is
still decelerating despite repeated stimulus efforts.

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